Mapping Enterprises in Latin America and the Caribbean 1

Enterprise Surveys e Mapping Enterprises in Latin America and the Caribbean 1 WORLD BANK GROUP LATIN AMERICA AND THE CARIBBEAN SERIES NOTE NO. 1 1/213 Basic Definitions surveyed in 21 and how they are grouped for analysis: In 21, Enterprise Surveys (ES) interviewed 12,8 enterprises in 3 Latin American and Caribbean countries. In addition in 29, 1,82 firms were interviewed in Brazil also following the standard ES global methodology. For analytical purposes, the 31 countries are categorized into 3 groups: Caribbean countries: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Suriname, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines -size countries: Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Uruguay, and Trinidad and Tobago countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Republica Bolivariana de Venezuela. Two waves of Enterprise Surveys, 26 and 21: Fifteen countries were surveyed in 26 using the ES global methodology: Argentina, Bolivia, Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Republica Bolivariana de Venezuela. In total, 1,93 firms were interviewed in 26, of which 3,3 were re-interviewed in 21. Reference periods of the survey data: The information collected in the surveys refers to characteristics of the firm at the moment of the survey (26, 21 and 29 for Brazil) or to the last completed fiscal year (2, 29, and 27, respectively). In addition, sales, employment, and labor productivity annual growth rates are calculated comparing data from the last complete fiscal year of each survey and recall data. Consequently, growth rates refer to the period 22- for the 26 surveys, 24-7 for the 29 Brazil survey, and 27-9 for the 21 surveys. The Enterprise Surveys (ES) provide information on the characteristics of firms across various dimensions, including size, legal status, ownership characteristics, trading status, and links to the informal or unregistered sectors. As is the case elsewhere in the developing world, the overwhelming majority of firms in Latin American and the Caribbean (LAC) are small and medium enterprises (SMEs fewer than 1 employees). Indeed, 91 percent of LAC firms fall into this category. The share of SMEs is higher in the small Caribbean countries, where 94 percent of enterprises are SMEs; elsewhere in the region, 89 percent of firms are SMEs (Figure 1). The average firm in LAC employs 47 full-time workers. firms, those with 1 or more employees, average over 274 full-time employees in LAC 22 percent higher than the 22 employees in large firms elsewhere in the developing world. Moreover, firms in LAC rely less on temporary employment than firms in other regions: on average, firms in LAC hire 8 temporary workers per year, approximately half the number hired by firms in SAR (18 workers) and EAP (13 workers). FIGURE 1 1 8 6 4 2 DISTRIBUTION OF FIRM SIZE ACROSS REGIONS (2 99 employees) (1+ employees) 1

FIGURE 2 FIRMS IN LAC ARE MORE LIKELY TO BE ENGAGED IN THE SERVICES SECTOR THAN IN MANUFACTURING International engagement in the private sector in LAC lags behind the rest of the world 1 8 6 4 2 Manufacturing Services As elsewhere in the developing world, firms in LAC are primarily found in service industries (Figure 2). Seven out of every ten firms in the region are in the services sector. The proportion is higher among the small Caribbean countries (8 percent) than in the rest of the region (67 percent). These averages are in line with global figures: 67 percent of firms elsewhere in the developing world are service firms. The LAC region contains a larger share of older firms than any other developing region in the world. Only 26 percent of firms in LAC have been in operation for less than 1 years. 2 The share of young firms is thus far lower than in ( percent), and the Pacific (46 percent), Eastern Europe and (36 percent), and (46 percent). The story is the same looking only at SMEs in LAC, where only 27 percent are young compared with over 4 percent in the rest of the developing world. Compared with firms in the rest of the world (with the exception of ECA), firms in LAC are more likely to be closed shareholding limited liability companies. 3 Indeed, 46 percent of firms in LAC are closed shareholding companies, while fewer than percent are publicly traded shareholding companies. Thirty-one percent of firms in LAC are sole proprietorships and almost all of these are SMEs, 97 percent. Compared with other regions in the developing world, foreign ownership in LAC is at median levels: foreign owners have a 9 percent stake in LAC firms on average, lower than the 1 percent in and 11 percent in, but above the 6 percent stake in Eastern Europe and and the approximately 2 percent stake in. As in other regions, the share of a firm that is foreign-owned is higher among large firms than in small and medium firms (Figure 3). Despite regional efforts to attract foreign direct investment, the data show that 87 percent of all firms in the LAC region have no foreign ownership and only 6 percent are fully foreign-owned. The level of foreign ownership in small Caribbean countries is double that of the large countries of the region: firms in the small Caribbean countries have an average of 11.4 percent foreign ownership, compared to.7 percent in the large countries. With respect to trade, thirteen percent of LAC firms are involved in exports, directly or indirectly, putting trade at average world levels: lower than in Eastern Europe and (22 percent), but slightly higher than in (11 percent) and (1 percent). Firms in the small Caribbean countries are the most likely to export, directly or indirectly, and their exports as a proportion of firm sales are also higher than for firms in FIGURE 3 Average Foreign Ownership (%) 4 3 3 2 2 1 1 PROPORTION OF FIRM OWNERSHIP THAT IS FOREIGN-OWNED (2 99 employees) (1+ employees) 2 MAPPING ENTERPRISES

the rest of the region. Nineteen percent of firms in the small Caribbean countries export directly, compared to 12 percent in large LAC countries and 1 percent in medium-size countries. Even among small firms, the small Caribbean countries are more linked to foreign markets than the rest of the region, with close to 1 percent of small firms being direct exporters, compared with only 6 percent for medium-size countries and about 4 percent for large countries (Figure 4). As opposed to the trend observed in exports, firms in LAC are relatively more dependent on the rest of world when it comes to inputs. Seventy-one percent of manufacturing firms use imported inputs in LAC, higher than the average of 61 percent elsewhere in the world. Within LAC, the small Caribbean countries have a higher percentage of importing firms (74 percent in the small Caribbean countries versus 71 percent in the medium-size countries and 6 percent in large countries). In some countries of the region, this dependency on foreign markets for inputs is almost universal: over 9 percent of manufacturers in Grenada, Barbados, and St. Kitts and Nevis use foreign materials and supplies. Competing with informality firms in the survey report competing with informal or unregistered firms. This is only slightly lower than in (66 percent) and considerably higher than in and Pacific (EAP), Eastern Europe and (ECA), and (SAR). Excluding LAC, the global average of firms that report competing with informal firms is 4 percent. Within LAC, competition with informal firms is common across all firm sizes. firms are the most likely to face competition from informal firms, as is the case in every region of the world, except EAP. However, only in LAC and do more than half of firms of all sizes experience competition from informal firms; in other regions of the world, at least among large firms, less than half experience this type of competition. When it comes to registering a company, throughout the region, the vast majority of managers 7 percent on average report that the main reason for registering their company was to comply with the law. Economic motivations for registration were reported at a distant second: 9 percent of managers gave better access to financing as their primary reason, while 8 percent cited access to customers and suppliers who deal only with registered firms. 1 Mapping Enterprises The widely held view that informality is common throughout Latin America and the Caribbean is confirmed by the ES data. Across the region, 64 percent of registered FIGURE 4 4 3 3 2 2 1 1 Caribbean PERCENT OF FIRMS EXPORTING DIRECTLY (2 99 employees) -size (1+ employees) Eighty-seven percent of firms in LAC were registered when they started operations, an average considerably higher than that of (82 percent), and and Pacific (84 percent), but below the ECA region (96 percent). 4 The fact that almost 9 out of 1 firms in LAC start formal and remain formal, coupled with the lack of economic motivation for registration, provide some indication that there may be a dual composition to the private sector: formal firms start up as formal and informal firms start up as and remain informal. Another dimension of informality is when formal firms engage in informal business practices, such as selling without receipts or hiring unreported workers. Based on the ES data, over half of firms report having dealings with formal firms engaged in one of these practices. When it comes to facing competition from firms that sell products without receipts, it is, again, the small enterprises that report facing the greatest competition, in both the small Caribbean countries and in the medium-size countries, while in the large countries, it is the medium-size enterprises that report the highest competition from this type of firm (Figure ). Competition with firms that fail IN LATIN AMERICA AND THE CARIBBEAN 3

FIGURE 7 6 4 3 2 1 PERCENT OF FIRMS THAT COMPETE WITH FIRMS SELLING PRODUCTS WITHOUT RECEIPTS -size (2 99 employees) Caribbean to report workers is consistently lower among large firms (Figure 6). The small Caribbean countries exhibit a lower incidence of both informality practices across all firm sizes. Who are the entrepreneurs in LAC? (1+ employees) average firm in LAC is relatively old, with a regional average of 2 years). Among those firms in which the founder is still the manager, more than one-third (38 percent) were created due to lack of better employment opportunities, which also suggests the social function the family firm may be playing in the LAC region. Looking at firms that are managed by their founders, approximately two-thirds were formed by copying or modifying an idea from the founder s work experience (Figure 7). While entrepreneurial firms are often credited with being job and growth creators, firms that opened their doors to develop an original idea turn out not to be the best performers. In large countries though not in medium-size or small Caribbean countries firms that were founded to develop a new have significantly lower employment growth rates than those that were founded to replicate a product. Similarly, in these large countries, firms that began operations by modifying an existing performed less well than those that simply copied a business idea or product. These results hold after accounting for other potential explanations for the differences, such as sector of activity, firm age, exporting status, foreign ownership, and firm size. The ES data confirms that family networks are still very strong in the private sector in Latin America and the Caribbean. For example, in 43 percent of the firms interviewed, the founder of the firm was still its manager at the time of the interview (and as pointed out earlier, the FIGURE 6 7 6 4 3 2 1 PERCENT OF FIRMS THAT COMPETE WITH FIRMS USING UNREPORTED WORKERS -size Contries (2 99 employees) Caribbean (1+ employees) FIGURE 7 1 9 8 7 6 4 3 2 1 Replicated a encountered in WHY DID YOU START YOUR BUSINESS? -size Modified a encountered in Modified a developed by other firms outside of Caribbean Replicated a developed by other firms outside of Developed a new 4 MAPPING ENTERPRISES

How do firms exit and enter the market in LAC? The Enterprise Surveys also provide an interesting perspective on the evolution of the private sector over time. Given that the ES was implemented in 26 in 1 LAC countries and that samples are representative of the formal private sector at the time of the survey, observing their evolution over time can develop a picture of the characteristics of firms that exit the market. 6 Between 26 and 21, one in four firms exited the market in LAC. Not surprisingly, SMEs exited the market at a higher rate than large firms: 26 percent of small and medium firms exited the market over this period, compared to 17 percent of the large firms (Figure 8). The data show that firms with higher productivity in 26, as measured by sales per worker, are more likely to remain in business in 21 than less productive firms, after taking into account other potential explanations for their survival, such as firm size, sector of activity, etc. 7 This is an indication that despite the global economic crisis FIGURE 8 Rate of Firm Exit 26 21 (%) 3 2 2 1 1 SMEs ARE MORE LIKELY TO EXIT THE MARKET (2 99 employees) SMEs: 26% (1+ employees) experienced during this period, the market economy of the region seems to have worked efficiently in driving the less productive firms out of the market. The data also show that small and younger firms are significantly more likely to exit the market: an expected outcome, as older and larger firms have learned to deal with their business environment. Lack of access to credit also proved to be significantly associated with market exit, access to credit being a necessity for firm survival. Endnotes 1. Lead authors: David C. Francis, Jorge Luis Rodriguez Meza, and Judy Yang, with the collaboration of the LAC report team. 2. This result is contingent on the age of the sampling frame used to draw the sample for each country, which varies across countries. Sample frames in the LAC region are not particularly older than those used in other regions of the world (typically 2 or 3 years old) and there is no reason why this should affect differentially the age distribution of LAC firms compared with the rest of the world. 3. Shareholding companies that do not trade their shares in the stock exchange. 4. For the Middle East and North region and this information is available for very few, small countries in the region.. Brazil is not included in this analysis of informality or in the next section s analysis of entrepreneurship, as the questions addressing these issues were not included in the questionnaire used in this country in 29. 6. Not all firms from 26 were selected for full ES interviews in 21; in order to allow a representative sample of fresh firms (i.e., firms that were not ly interviewed), limits were placed on the number of panel firms interviewed in survey design. In order to gather data on whether firms exited the market, all firms ly interviewed were polled to determine if they were still in operation. However, due to response rates below 1 percent and issues emerging from the quality of contact information, certain assumptions were used to estimate exit rates. Here, in addition to all firms confirmed to be in operations, firms were assumed to be in operation if an answering machine or fax line was reached, the respondent directly refused the interview, or if the firm moved outside of the area covered by the survey design. 7. Age, exporting status, the annual growth in the manufacturing and services sectors, and senior management s time spent on regulation. 1 Mapping Enterprises Enterprise Surveys provide the world s most comprehensive firm-level business environment data in developing economies. An Enterprise Survey is a firm-level survey of a representative sample of an economy s private sector. The surveys cover a broad range of business environment topics including access to finance, competition, corruption, crime, gender, infrastructure, innovation, labor, performance measures, and trade. The World Bank has collected this data from face-toface interviews with top managers and business owners in over 13, companies in more than 13 economies. Firm-level data and summary indicators are available on the website. www.enterprisesurveys.org IN LATIN AMERICA AND THE CARIBBEAN